Audio missing out on video's sound profit

DSN Retailing Today, April 5, 2004

Consumer electronics products may be enjoying unprecedented popularity overall, but a look at individual components doesn't always smell like roses--or sound like them--as the audio category continues to struggle through a prolonged sales slump.

Audio sales peaked in 2000 as close to $9 billion worth of product was shipped from manufacturers, and it's been declining ever since, according to the Consumer Electronics Association (CEA). Factor in DVD player sales (the units are replacing CD audio components) and the picture becomes less bleak, but one of decline nevertheless. In terms of price declines, wholesale audio prices are dropping faster here than with video goods.

The culprits, according to Sean Wargo, CEA's director of industry analysis, are MP3 and home theater in a box (HTIB), two of the few bright spots that are actually enjoying increased consumer interest while simultaneously impacting the overall category in the negative. Sales of headset CD players with MP3 playback were up 261% in 2003, in-dash units with MP3 playback rose 130%, flash/HDD-based players jumped 74% and sales of HTIB with a separate DVD player increased 55%, according to CEA tracking data.

"There is a good consumer market out there right now that we should be tapping into," suggests Wargo. "It's the family wanting to have a more realistic home theater experience."

Currently, consumer spending is focused on video, thanks to the vast array of thinner profile displays, and the allocation of dollars to these products has risen in comparison to what they're spending on the corollary sound components that can be critical to enjoying that pricey new display--a message the industry and retailers need to better communicate to consumers.

"Our message going forward is if your making significant a investment in the display, you should consider making a correlative or commensurate investment in the audio portion," said Wargo. "So far that's not happening." The average price for HTIB is $265, while components bought separately tally up to $635. Clearly, consumers are looking for the value provided by a package, and retailers have obliged by making an increased assortment available from specialty outlets to discount department stores.

But consumers are also looking for some kind of control or central device for their entertainment units. According to Michael Abt, president of Abt Electronics, consumers are gravitating toward receivers to do just that, with an average price tag of $1,000. "It doesn't translate into a growing receiver market right now, but my sense is, it's good margin," said Wargo.

New designs can also boost sales. Slimmer profile speakers and components are attracting the same consumers that covet flat-panel displays. One such product generating buzz is a single speaker home theater system. Developed by Nirotek, the system combines a progressive scan DVD player/AM-FM receiver with digital amplifier in a casing shorter than two inches high. A single speaker and subwoofer provide Dolby 5.1 surround sound.

"The barrier that's been holding people back is not price, it's the clutter and complexity," said Lonnie Pastor, vp, Nirotek. "We've broken it down to the fewest possible components."

The system, which sells for $599 and $799, is available strictly online, and according to Pastor, more than 1,000 units were sold in the first few months of availability based on nothing but PR. While Pastor claims that Nirotek intends to stick to its distribution model of bypassing retailers and going direct to consumers, there's a lesson there for existing stores: Consumers are willing to purchase audio products without even a demonstration.

"Very few stores actually offer that option," said Pastor. "There's very little value in that."--unless you count increasing higher margin sales in a declining category.